Valuation Flashcards
What is the key mandatory standard for valuation?
RICS Valuation – Global Standards 2024 (Red Book Global)
Difference between internal valuer and external?
Internal is employed by a company to value the assets of the company/enterprise , no third party reliance.
External – no material links with the asset to be valued or the client.
What to ask yourself before accepting an instruction?
- Competence
- Independence
- ToE
What Statutory due diligence is required for valuations?
Need to check there are no material matters that could impact the value.
Asbestos, BR, contamination, equality act 2010 compliance, environmental matters, EPC, flooding, fire safety compliance, health and safety, highways, legal title and tenure, public rights of way, planning history.
Please can you talk me through the timeline of a valuation instruction?
- Receive instruction
- Confirm competence
- Confirm independence
- Issue ToE
- Receive signed ToE
- Gather information
- DD – no matters that could materially impact value i.e. contamination, flooring, EPC, Equality Act, legal title
- Inspect and measure
- Research market and assemble comparables
- Undertake valuation
- Draft report
- Vet report
- Finalise and sign report
- Report to client
- Issue invoice
- Confirm file notes in order
What valuation methods are included in the Red Book? Eg. 5 methods
Income: investment, residual, profits – converting current and future cash flows into cap value
Cost: DRC – reference to the cost of the asset whether by purchase or construction
Market: comparable
These are the IVS 105
What is the methodology for the comparable method?
- Search and select comparables
- Confirm/verify details and analyse to headline rent to get net effective
- Comparable schedule
- Adjust using hierarchy of evidence
- Analyse to form opinion of value
- Report value and prepare file note
What RICS professional standard is there to follow for comps?
RICS PROFESSIONAL STANDARD: Comparable evidence in real estate valuation 2019
- Valuer should use professional judgement to assess the relative importance of evidence on a case by case basis
Explain the hierarchy of evidence?
Relative weight attached to the different types of evidence.
A: direct comparables
B: general market data that can provide guidance
C: other sources, transactional evidence from other locations, types, other market influencers.
Where to find relevant comparables?
Inspection of an area, seeing local boards
Visit speak to local agents
In house records or websites like EGI
Date of evidence is crucial.
When would you use the investment method?
- Income stream
- The rental income is capitalised to produce a cap val
- Conventional method assumes growth implicit valuation approach
- Implied growth rate is derived from the market cap rate (yield)
What’s the conventional method of the investment method?
Rent received or MR x the years purchase to calculate the MV.
Importance of comparables for the rent and yield.
When would you use term and reversion?
Reversionary investments, when under-rented. Term capitalised until next review/lease expiry at an initial yield
What is the investment valuation based on?
Concept of discounting to reflet the time value of money. Discounting takes the future sum that will be received and deduct the annual interest or investment return that could be earned if the money was in hand in the present and invested in a bank.
What’s the years’ purchase?
The relationship between the income and its capital value is traditionally known as the years purchase (YP).
YP = (1 – Present value) / discount rate
What is an all risks yield?
The remunerative rate of interest used in the valuation of fully let property let at MR reflecting the prospects and risks attached to the particular investment.
Eg. The YP for an property let at £10,000 and its market price is £200,000. It will take 20 years for the income to replace the market value.
However, buildings get older and there will be more outgoings etc.
When would you use term and reversion?
Reversionary investments, when under-rented. Term capitalised until next review/lease expiry at an initial yield. Reversion to MR valued in perpetuity at a reversionary yield.
Two different input yields are often applied to determine the output yields. If only an initial yield was used as the cap rate/input yield, the equivalent and reversionary yield would be the output yields.
Valuer might apply a lower or higher yield to the MR to reflect the valuers perception of the risks relating to the reversionary rent (MR after the current lease has expired).
Usually a higher cap rate applied to reversionary income.
What is the layer and hardcore method?
- Over rented investments
- Income flow divided horizontally
- Bottom slice = MR
- Top slice = rent passing less MR until next lease event
- Higher yield applied to the top slice to reflect risk
- Different yields used to depend on comparable investment evidence and relative risk.
How do you determine a yield?
Risk is the main consideration, in relation to:
- Quality of location
- Covenant of income
- Lease terms
- Liquidity
What is a yield?
Measurement of return on an investment. Based on risk profile and prediction of growth
Income / price x 100
What do you understand by the term years purchase?
The number of years it will take for the income to repay the purchase price.
What is a return?
Performance of a property, measured retrospectively, used a DCF calculation to find the IRR
What is growth implicit?
Yield adopted assumes many of the assumptions that are made explicit in a DCF approach and the risks are hidden in the selected yield. Need to use comparable method to decide the yield.
True yield?
Assumes rent is paid in advance not in arrears (traditional valuation practice assumes rent is paid in arrears)
Nominal yield?
Initial yield assuming rent is paid in arrears
Gross yield?
The yield is not adjusted for purchasers costs (such as auction result)
Net yield?
The resulting yield adjusted for purchasers costs
Equivalent yield?
Average weighted yield when a reversionary property is valued using an initial and reversionary yield
Reversionary yield?
a term used in the property market to describe the yield that should be achieved if the passing rent adjusts to the level of the estimated rental value.
Running yield
the yield at one moment in time
Initial yield
Simple income yield for current income and current price.
However, if the property is vacant or subject to high vacancy, it would not be appropriate to value off the initial and would value off an equivalent yield.
If there is lots of vacancy what yield will be shown and what do vendors agree to?
A highly reversionary investment (or wholly/partially vacant asset) will show an unusually low initial yield. This will cause difficulty for investors who finance their purchase with debt since there may be insufficient income to cover the interest charges in the initial years. It may also present a problem for institutions that need to maintain a certain level of income yield.
Sometimes this problem is overcome by the vendor agreeing to ‘top up’ the income in the initial years or provide rental guarantees for a set period of time on vacant space
What is DCF?
Seeks to determine the value of a property by examining its future net income or projected cash flow from the property and then discounting the cash flow to arrive at an estimated current value of the property.
Eg. Used for short leasehold interests, phased developments, alternative developments.
Simple DCF method to find MV?
- Estimated the cash flow (income less expenditure) for an agreed holding period
- Estimate the exit value at the end of the holding period
- Select the discount ate
- Discount cash flow at discount rate
- Value is the sum of the completed cash flow to provide the NPV
A positive NPV means the investment has exceeded the investors target rate of return.
Whats an IRR
Rate of return at which all future cashflows must be discounted to produce a NPV of zero.
Considers assumptions such as rental growth, reletting and exit assumptions
How would you undertake a profits method valuation?
Value of the property depends on the profit generated from the business, not the physical building or location. Use accounts from last 3 years.
Annual turnover (income)
- (LESS) Cost / purchases = gross profit
- (LESS) Reasonable working expenses = unadjusted net profit
- (LESS) Operators renumeration = adjusted net profit
Can be expressed as the EBITDA.
Capitalized at appropriate yield (YP x) to achieve MV
Capitalise this at an appropriate yield to achieve market value.
What is the profit method used for?
Pubs, petrol stations, hotels, guest houses, children, leisure and healthcare properties, care homes.
What is a residual site valuation?
GDV – total development costs including profit.
What makes up the total development costs?
- Site preparation (demolition costs, clearing)
- Planning costs – CIL / S106
- Build costs – Building cost information service (BCIS) usually on GIA basis.
- Professional fees 10-15% +VATa
- Contingency 5-10%
- Marketing costs and fees 1-2%
How to calculate finance for a residual?
Choice of interest rate:
* Current SONIA rate (sterling overnight index average)
* Base rate plus premium
* Rate at which developer can borrow money
What are the 3 elements of finance?
- Site purchase (include purchasers costs) – compound interest (straight line basis)
- Total construction and associated costs – calculation based on an s-curve taking half the costs over the length of the build programme
- Holding costs to cover voids until the disposal of the scheme = compound interest on a straight line basis
What is developers profit?
15-20% depending on the risk.
What are the two methods of funding for development finance?
- Debt – lending money from a bank or other funding institution
- Equity – selling shares in a company or joint venture partnership or own money
Residual What are the different types of sensitivity analysis?
Simple
Scenario
Monte Carlo
What are swap rates?
Form of derivative hedging rate for interest rates. It is the market interest rate for fixed rate, fixed term loans.
How would the valuation process differ on a property that is held long leasehold versus freehold?
Ground rent is deducted from the gross income to calculate the net rent received.
What is the standard accepted margin of error according to the UK supplement?
Singer & Friedlander vs. J.D.Wood (1967) 5-15%
What is CIL and Section 106?
CIL - is a tariffed payment to support local infrastructure to support a new development
S106 – a negotiated legal agreement for planning obligations to gain planning consent
What yield would you adopt for a multi-let office
Assuming there are co-terminus leases with similar covenant, I would used a blended yield
Core content of a valuation report
Valuation date; basis of value; valuation figure; comment on market uncertainty
What is marriage value?
The enhanced value of brining two interests together over above their single and individual interests.
What is hope value?
The value arising from any expectation that future circumstances affecting the property may change.
- Future prospect of securing planning permission for the development of land, where there is no planning
In valuations, is being wrong the same as being negligent?
No, as you are allowed a margin of error. (5% resi, 10% commercial, 15% specialist property)
What to do if someone is not happy with the value you provide?
Meet with client and discuss their concerns
Confirm whether or not there was any new evidence
If not, communicate cannot change it. Advise they seek a second opinion.
When would you use the deprecated replacement cost method?
Contractors method. Only if limited or no comps for specialised properties. Eg. Lighthouse, oil refineries, schools, docks.
Owner occupied property, account purposes.
- Value of land in its existing use (assume planning permission exists)
- Add current cost of replacing the building plus fees less a discount for depreciation and obsolescence/deterioration
Not suitable for secured lending purposes.
What is special value ?
Amount that reflects particular attributes of an asset that are only of value to a special purchaser.
For example, tenant purchasing freehold interest.
What are purchaser costs made up of?
Stamp duty
Agents fees
Solicitors fees
VAT
Why was the RBG updated?
To support high standards in valuation delivery worldwide and future-proof practices in the public interest
What’s the order for VPS to align with the IVS and the changes?
VPS 2 is now VPS 4 (inspections, investigations, records)
VPS 3 is now VPS 6 (valuation reports) + ESG
VPS 4 is now VPS 2 (bases of value, assumptions and special assumptions)
VPS 5 splits into VPS 3 (Valuation approaches and methods) and VPS 5 (Valuation methods)
A new VPGA 11 relating to the relationship with auditors.
Key changes of the red book?
- Alignment with the new IVS 2025
- New content relating to valuation modelling and methods incorporating findings from the independent review real estate valuations 2021
- ESG reporting, valuers mut record relevant esg data and factors that might impact valuation
- Use of AI in valuation
- Reinforcement of the need for robust and comprehensive audit trial
- New VPS
Whats the structure of the red book?
- Introduction
- Glossary
- Professional standards (PS1 and PS2)
- Valuation technical and performance standards (VPS 1-6)
- Valuation practice guidance applications (VPSA 1-11)
- IVS
What valuations are exempt from compliance to VPS1-6?
- Agency for disposal or acquisition
- Advice for preparing of negotiation
- For expert witness
- For statutory functions
- Internal purposes
What is PS2?
Ethics, competency, objectivity and disclosures. Valuers should always apply professional scepticism.
What is VPS1?
ToE. Eg. Valuer name, client, asset, currency, purpose, basis of value, assumptions, ESG factors, etc.
VPS2 – what is MV?
Amount of the asset that a willing buyer and a willing seller is likely to pay on the valuation date.
VPS2 – MR?
Amount of which a property should be leased on appropriate lease terms.
VPS2 what is fair value?
The price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.
IFRS13
VPS2 investment value?
Value of an asset to a particular owner, differs from MV as is a reflection of worth
VPS 4 – explain inspections, revaluation and valuation records?
This is appliable to my level 3 example – revaluation. It was a desktop but we had inspected a year before and no material changes had changed.
Valuation records – proforma inspection sheet.
Explain VPS 5 ?
Valuation models – new 2024.
IVS defines “quantitative implementation of a method in whole or part that converts inputs into outputs used in the development of value”
If a complex model is used, valuers must make a professional judgement
Greater vigilance is needed to ensure that there is no internal inconsistency or error
What section is secured lending related to in RGB?
Part 5, VPGA 2
- Any involvement with the prospective borrower or the property must be disclosed to the lender
- Previous involvement includes within the last two years
Give an example of when VPGA2 results in a CoI?
- Longstanding professional relationship with the prospective borrower or owner
- Valuer will gain a fee for the intro
- Financial interest in the property holding or prospective borrower
- Valuer is retained to act in the disposal or letting of the completed development on the subject property.
- Longstanding professional relationship with the prospective borrower or owner
- Valuer will gain a fee for the intro
- Financial interest in the property holding or prospective borrower
- Valuer is retained to act in the disposal or letting of the completed development on the subject property.
- Agree to the loan or not.
- SWOT
commercial SDLT
Over £250k is 5%
residential changes 2025 - SDLT
Previously there was no tax between £0-£250k and now it is from £125-£250k is 2%.
£250k-£925k 5%
£925k to £1.5m – 10%
Over £1.5m – 12%
What are the changes for first time buyers?
£00k-£500k is 5%
What yield did you use if it was rack rented?
I used an ARY based on comparable evidence. The best evidence was from a site nearby. The leasing deal was from within the subject and westside nearby.
What is fair value? And why did you use it?
The price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.
IFRS13
I used it was this was an internal valution.
What are the implications of a property being rack rented?
Not as attractive to investors because there is no reversionary.
What type of planning permission was your residual example?
Implemented full planning.
Why did you not consider any affordable housing provision?
If more than 10 homes you have to put 35% affordable homes
What is the affordable housing provision for Brentwood?
35%
What are the limitations of BCIS?
- Reliance of averaged data, may not reflect specific project details.
- Regional variations
- Design impact
- Data accuracy
- May not reflect market fluctations or recent changes
What are the limitations of argus developer?
Because it runs appraisals with a lot going on behind the scenes so you cant see these things
- If there are a certain number of licences within the company there could be a confidential issue
- It assumes 100% debt
What finance rate did you use?
7% it was the norm developers could borrow.
What is the typical Loan to Value ratio?
Typically, 50-60% - it was previously 70% but lenders are now more risk averse
What is the difference between a development appraisal and a residual valuation?
Residual is a dev app but it is used to find the value of the land using MARKET INPUTS
Development appraisal is used to assess viability of a scheme using CLIENT INPUTS (can also find the land value)
What’s a special assumption?
Assumption that is taken to be true and accepted as fact, even though it is not true.
What was the discount and what comp did you use?
20% discount, the comp was from a site in elephant and castle.
What was included in the SWOT for the industrial level 3?
Weakness short wault 1.71 years, dated. Strength – good tenant, opportunities refurbish unit.
What was the MR and MV of level 3 shed?
MR was £820,000 (£15 psf) and MV £12.35m
How much have the average rents gone up un Amshersham sheds?
17% in 3 years
why did you account for expiry void and rent free?
short income left, break is 1.71 years.
whats the proft method?
The profits method involves establishing fair maintainable operating profit (FMOP) capable of being generated by a reasonably efficient operator (REO). This is based upon assessment and analysis of fair maintainable turnover (FMT), requiring sound knowledge of accounting principles and market norms for the specific industry sector. A market-based profit multiplier is then used to convert FMT into a capital value
Calculation FMT x profit multiplier = capital value
